Asian firms can take the lead in curbing poverty, WB says

FAMILY-OWNED Asian businesses like the conglomerates that dominate the Philippine economy get a bad rap from more widely held “western” corporations, which are seen as more competitive due to better management.

But big businesses where power is shared among brothers and sisters or parents and their children can excel where other companies owned by investors obsessed with quarterly reports typically fail: investing for the long term.

It’s this advantage that can make Asian firms leaders in creating business models that tap the base of the pyramid, resulting in meaningful reductions in poverty.

“They invest for the long-term. For some reason, the companies we’ve dealt with for years that have been successful have been family-owned companies,” said Eriko     Ishikawa, global head of the Inclusive Business group at International Finance Corp. (IFC), the World Bank’s private investment arm, “They’re not just trying to make a quick buck.”

Delayed gratification

In an interview with the Inquirer, Ishikawa said family-owned businesses were accountable to shareholders with both financial and sentimental ties to companies.

These shareholders are either the founders of the companies they run, or close kin.

As a result, these types of firms, which are common in Asia but less so in Europe and North America, are more comfortable with delayed gratification.

Ishikawa delivered the keynote speech at the Asia Pacific Economic Cooperation’s (Apec) High-Level Discussion on Inclusive Business in Makati City last week.

Creating more inclusive business models, Ishikawa said, should be part of large corporations’ core operations.

Reaching the so-called “bottom of the pyramid” should go beyond philanthropy and corporate social responsibility (CSR) projects.

Operating in a more inclusive way can range from designing products aimed at lower-income households, to finding ways to include small informal businesses in large supply chains.

These types of business models already exist in the Philippines.

One is the “Tubig Para sa Barangay” or Water for the Poor service, a project by Ayala-led Manila Water and co-funded by the World Bank.

Through support funding from the World Bank in 2007, Manila Water, one of two major water concessionaires in Metro Manila, was able to lay pipes that provide a steady supply of clean water to 45 poor neighborhoods.

The program effectively lowered the price of water from P150 per cubic meter to P7 for 1.6 million low-income residents of Manila.

The program also improved Manila Water’s network efficiencies, recovering 700 million liters of water per day.

Core program

By improving its services, Manila Water also saw an improvement in collection efficiency from 15 percent to 100 percent, solving the problem of illegal connections.

Jollibee Food Corp.’s Farmer Entrepreneurship Program, which began in 2008, is also seen as an inclusive business model that benefits small farmers and helps fatten the company’s bottom line.

Jollibee helped organize a core group of farmers, helping them integrate their activities to improve scale and lower cost.

In 2010, the growing collection of farmers sold 236 million metric tons of bulb onions to the fast food giant, which bought products at fair market rates.

Another is Kennemer Foods’ Cacao Growership Program.

The firm tapped about 10,000 farmers to supply cacao beans to the company over 10 years.

Farmers’ incomes are expected to grow seven-fold.

Meanwhile, Trade and Industry Undersecretary Adrian Cristobal cited Nestlé’s Nescafé Plan that offers technology, training, and technical support to tens of thousands of Filipino farmers, developing them into long-term direct suppliers for the company.

Business models

Through a combination of direct buying and capacity building, Nestlé hopes to grow local sourcing from 30 percent to 75 percent of total supply, while engaging over 83,000 farmers as suppliers, by 2020.

“This is expected to result in significant supply chain cost savings for Nestlé, as well as new competitive advantages from the use of Philippine Robusta coffee beans, which offer superior yields in instant coffee processing,” Cristobal said.

Ishikawa said projects such as these showed it was possible for inclusive business models to be commercially viable.

“You can have long-term profitable returns and still be reaching low-income communities,” the IFC official said.

On a larger scale, Ishikawa said engaging with the base of the pyramid made economic sense as this leads to more stable business conditions.

Inclusive business models, she said, would help address what “trickle-down economics” policies have failed to achieve.

“Trickle-down economics is a very important component of development, but you’ll never get people in rural areas out of poverty,” Ishikawa said.

“The old model is not working. Development will have to be changed … and policies have to be pro-poor and pro-private sector,” she said.

“But it’s almost as though no one can understand how those two circles can intersect,” she added.

Base of pyramid

In the Philippines, the base of the pyramid is composed of poor and the low-income families or the bottom 40 to 60 percent of the population by income.

These families make less than P18,000 per month. Of this, 40 percent have less than P12,000.

The poor are defined as families with less than P9,000 monthly income.

In the Philippines, 26 percent of the population is classified as poor.

Helping raise the incomes of these poor homes will help create new customers for local companies, big or small, leading to a positive feedback loop that benefits all parties involved.